Proper perspective is always important. Particularly in confusing times such as these.
Emotion is the enemy of every investor. It makes us do the wrong thing at the wrong time for the wrong reason. It makes us greedy when stocks are rising, and it makes us fearful when stocks are falling. Intellectually we know we should be sellers when we are feeling greedy and we should be buyers when we are feeling fearful. But that’s really hard for most people to do. It takes the courage of one’s convictions to go against the grain. It feels safer to run with the herd, even if the herd is running in the wrong direction.
There is a lot of serious stuff to consider in a down market. When will stock prices stop falling? Are we headed into a recession? Are there global concerns? What about currencies and commodity prices? What will the Fed do? Will Congress help or hinder? How are investors supposed to make sense of it all? Who’s to blame them when their emotions get the better of them and they throw in the towel when things look bleak?
Proper perspective can help keep emotions in check, particularly when perspective is accompanied by a plan. First, whenever fear takes hold, tune out the noise and focus on what really matters. Remember that our portfolio is not invested in “the market”. It is invested in companies – good companies that grow their earnings and dividends regularly through most any environment.
Second, remember that we have a plan. Our discipline allows us to be proactive instead of reactive. Our job is to buy low and sell high, and we have a process that does exactly that. On a stock-by-stock basis. It analyzes what each individual company is doing, not “the market”, and not anything else.
Often preceding a down market many individual stocks will tell us that their growth is slowing, and their price is overvalued. Not every stock will give us this signal, but certainly more than usual. And we follow these signals, or at least try to, allowing us to sell before the market begins to decline. As a result, cash builds up in our portfolios. Eventually stocks will begin to tell us that their prices are too low and do not properly reflect their prospects for growth. And we will have the cash on hand to buy those stocks when the time comes. To us, this approach is quite logical. Unfortunately for many investors, it is not widely followed. It eliminates emotions and adheres to a discipline. It is proactive.
We rely upon this discipline to guide us without emotion and to follow the signals each stock is giving us. It is simple, logical and understandable. Sometimes investors overthink things. Remember, complicated isn’t better. It is just harder to understand.
No matter what is in store for the stock market during a downturn, and beyond, know that at some point prices will go down enough to scare a lot of investors. Whenever this has happened in the past, widespread fear has caused prices to fall further than they probably should have. But so far, stock prices have always come back. The Great Recession was pretty scary stuff, but the market recovered from that. It recovered from the Tech Bubble, Black Monday in 1987, the Cuban Missile Crisis and even the Great Depression.
Proper perspective will see you through whatever lies ahead. We have a plan, we are proactive, and you can understand your investments, which means you can filter out the noise and focus on what matters most – the companies you own. Some you may not have heard of, but most you will have. Much like our investment process, they are simple, straight forward business. Buying low and selling high isn’t easy. If it were, everyone would be doing it! But with the proper perspective (and a plan) it can be done.